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THE ECONOMICS OF THE PRIVATE MARKET

Banks as Buyers of Private Placements

Appendix C describes regulatory restrictions on bank purchases of private placements. To summarize, and ignoring minor exceptions, banks may not buy privately placed equity, but they may buy private debt so long as it is booked as a loan for regulatory purposes. Bank holding companies may buy limited amounts of equity and may buy privately placed debt without restriction.

Almost no data on the share of new private issues that is purchased by banks are publicly available. As part of a staff report on Rule 144A dated September 30, 1991, the SEC collected information on initial purchasers of sixty-nine Rule 144A placements issued from April 1990 through July 1991. Banks and savings and loan institutions (which were grouped together in the report) were initial purchasers of only $232 million of the $6.75 billion, or 3.44 percent of placements in the sample. They purchased only 4.16 percent of sample placements of straight debt, 7.42 percent of placements of asset-backed securities, and 0.7 percent of placements of common and preferred equity. Similarly, U.S. commercial banks purchased only about 3 percent of a different sample private placements (see table 7).

The extent to which these samples are representative of all private placements is not known. As noted in appendix C, we have some reason to believe that banks may be less willing to purchase Rule 144A placements because performing normal loan-underwriting due diligence for those may be more difficult than for traditional placements.  Anecdotal evidence obtained in interviews, however, confirms that banks are infrequent buyers of private placements. According to market participants, most banks prefer investments of shorter duration than the average private placement. Relationships of issuers with buyers of placements also tend to be less close than relationships of loan borrowers with bank lenders, and banks like the opportunity to sell other services that close relationships provide. Market participants suggested that a bank is most likely to buy part of a placement when it already has a relationship with the issuer (since costs of due diligence are small).

All-in returns on private placements of debt may also be smaller for banks than for insurance companies. Most banks would probably swap the fixed-rate payment stream of a placement to match the repricing pattern of floating rate liabilities, and the cost of such swaps may make most placements unattractive to banks.

In summary, no major regulatory barriers to bank purchases of private placements of debt appear to exist, but various economic considerations may make placements less attractive than other investments to banks. Banks seem unlikely to become major buyers of private placements in the near to medium term.

Banks as Competitors of Private Placement Lenders

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